Readers' comments

With all due respect and coming back to the original article: the whole line of argument is not clear and the comparison between a federal state and a union of indepentent nation states seems to me a rather sloppy one!

Unfortunatly, a weak contribution to your otherwise often well researched magazine. In conclusion, a subjective as well as "Britocentric" piece of journalism which not only lacks cohesion but also unreflectively mirrors the UK´s current political hostility towards the EU; a shame-in both cases.

1) You are rooting for the wrong team here: The "French lady" at the helm of the IMF is the driving force behing calls for a Greek haircut, the "Iron Lady" in Berlin is against them (which is, I believe, only a bargaining position). So for once, your position is identical with that of Angela Merkel. LOL

2) The model you present as an alternative is a transfer union – and that won't fly. I'll discuss it when ANY government calls for it, but no sooner. So far, not even our Greek friends are asking for it.

3) The EU budget and/or the national budgets of the euro zone member states are not an emergency fund for insolvent EU/euro zone member states. Greece is bankrupt, and a managed bankruptcy (a series of further haircuts, accompanied by structural reforms, by the end of which Greece would be able to match receipts and expenses) is the only way to get its finances back on sound footing again, I believe.

4) The model you suggest instead (transfer union) would not even keep up appearances that Greece was still solvent. Which investor around the world has not yet noticed that isn't the case?

5) It is of course possible to enact the necessary reforms to straighten out Greece's fiscal problems even now. Why shouldn't it be? When you hear "reform", you seem to think of austerity, while I think of structural reforms – which is what is lacking in Greece. Structural reforms cost hardly any money.

6) This nonsense about Greece being the incubator of a pan-European crisis is contradicted by the most basic of facts:

The Greek crisis began when the Greek government admitted it had cooked the books for 10 years. That was in November of 2010.

The Irish and Spanish crises began when their housing markets collapsed. That was in October 2008 - or a full TWO YEARS earlier.

Its interesting to see the "america-like" microcosm that is presented in Germany (another Federal nation). But the big picture and its lesson is being missed by Europeans and Germans alike. A fully unified Germany and America but federal states with fiscal consolidations and unified bonds help ease the pain of other indebted weaker states. Another reason to re-visit the common Eurobonds.

Why can Germany not help unify the bonds and, just as America, organize the EU so that deficits are not allowed at states levels but they are at federal ones? This would certainly be a tremendous stride towards fiscal consolidation and easing the crisis. Much more than signing checks or continuing QE from ECB.

Comming from Colombia, in South America, I have no quarrel in the intricacies of national characters of Europe, but the solutions seem so evident. As a concerned citizen of the world which aims for the success of the European Union economies, i urge responsibility form the Europeans and take they lessons of their own people.

Precisely my point, it probably should attempt to be a Federal State, or simply be independent and just have a customs union but not a monetary union. Right now you have the worst of all worlds. A monetary union without fiscal, and political union without federalism. This way if the crisis continues, you might as well destroy both: the monetary and political union.

Why not try federalism? Germany has shown how good this can work. America has shown how this can work, and to a similar extent, the United Kingdom has shown how this union must work. Politica, monetery and fiscal unity are the only answer. All 3 need to be there. not just 2.

Hi,
Givers and takers. Makers and Breakers. Walk on; Walk on you’ll … “Bavaria Can Also Go It Alone”. Strange things are going on. When a CSU spokesman telephones a public broadcaster (ZDF), and says it's up to them to stop reporting on the political opposition (SPD) the prelude to the fasnacht carnival season in Bayern will be a field day the Narren. Funny.

Transfer payments between people, states and nations need to be, if happen at all, potentially temporary! Otherwise such payments create subliminal ill will and even openly voiced hostilities, as this is the case currently in Europe.

Commenter Andrew Oliver (Oct 26th, 15:26) formulated the general view in this matter of his fellow Americans. There is sound reason why the USA NEVER imposed transfers between state governments: Exactly because of the danger that this would lead to hatred among states and consequently to serious secession attempts. Nobody needs this.

Correctly Andrew Oliver wrote: “If the federal government be of the opinion that there are depressed areas . . . then the federal government should be empowered to raise fair non-discriminatory taxes federation-wide and spend them on useful infrastructure in such said depressed or damaged areas ... This should be done in the name of (federal) prosperity. Inter-governmental transfers however encourage buck-passing and corruption by governments and breach the principle of responsible government!" (End quote).

I'm wondering why European politicians, claiming the euro-creation was a 'peace-keeping' measure (some even referred to the new currency as a "bit of a peace guarantee"), are currently trying to create a “sure wrecker” of the whole European idea: An inter-governmental transfer union without a federal government.

Something that worked "only just" within one "nation" (Germany, an entity which is essentially defined by sharing FOR EVER a common fate) will NEVER work on an "inter" national level, where nations most notably try to safeguard their national interests and, thus, are in no way ready to share "common fate" lastingly (callable treaties are no substitute for "national spirit"). One doesn't need to be a prophet to bode that the latter construct will - sooner or later - destroy the European idea all together.

BTW, exactly this is the true reason why so many E.U.-haters - also here on these blogs - advocate so vehemently that "Germany must accept the European Transfer Union", e.g. vivashorsemachete (alias
leaveittoviva alias vivazapata), emmafinney (alias sherryblack) etc.

One reason to put an end to the redistribution system would be that it would stop the endless whining of the givers. I would do anything not to have to listen anymore to that pathetic litany of how they pay for others, how they work and others just sit around.

Solidarity is one side misuse is the other.
There are always tensions between givers and takers. But some states have received solidarity for over 60 years and some never ever paid into the transfer system - not even one time. This leads to questions.
The experience is that some states found themselves very comfortable in their position.
Whatever it takes, 4 out of 16 will pay for their needs. And that is exactly what makes givers so angry. Instead of seeing in Bavaria an example they offend Bavaria. Ja, it is true. Bavaria has received aid for many years. BUT at a certain point Bavaria changed the side and, then, Bavaria has constantly paid in the transfer system. In contrast to many other states. Moreover many single out that Bavaria has paid until today much more in than it had received before. Something the state Berlin should be aware of and many others.
It is obvious that there is a disproportion if 4 states pay in and 12 live on transfers from those 4 states. Insofar the query should be what did Bavaria right and what do the others wrong? Curiously is that the less a state spends (achieves a surplus) the more this state is obliged to give away its savings and on the other hand states that receive money can splurge because they receive even more the next time. And the end it makes no sense to be economised.
The transfer system should help but instead it stiffens the status quo.
Suffering under this experience, maybe, foreigners understand why Germans (from the giver states) are so distant concerning any transfer system that is set up equally to the Länderfinanzausgleich, especially if it should be applied to the euro zone.
I could not find any clue that this will work.

Each government federal state and local should raise its own taxes and set its own budget, with no transfers of any kind.

If the federal government be of the opinion that there be depressed areas or areas so damaged by natural disaster or military action by foreign powers (or local powers!) or civil insurrection then the federal government should be empowered to raise fair non discriminary taxes federation wide and spend them on useful infrastructure is such said depressed or damaged areas ... and also spend said taxes on better education of the workforce in said depressed or damaged areas. This should be done in the name of properity.

Nevertheless the process of selection of infrastructure projects requires strict parliamentary oversight by parliamentary committees, to better prevent the inappropriate building of bridges to nowhere, monuments to nobodies, and expensive high speed rail projects that massively overprovide passenger capacity that'll take decades to find enough passengers to make financial sense!

"Germans fear a European transfer union because they hate their own one"

Wrong! Germans fear a European transfer union because money is not growing on trees. We work for our money, we must earn it. Why should we gift our earning to other rich Europeans? So that they can more likely afford a Mercedes while we can less likely afford the very same Mercedes? Nice for Mercedes, nice for the South, bad for us citizens. Something stinks here.

And why would receiving politicians reform anything? Why would receiving voters vote for different reform oriented politicians? They'd get rewarded for their corruption, tax evasion, rigid markets, inefficient red tape, extremely stupid voting decisions etc. by us .. which stinks as well. Why should especially those who are in charge of reforming those countries do that if it doesn't suit their clientele and costs votes if they profit from a corrupt system and if the Fritz is gifting enough money at the same time? The people need bread and games to be quiet, don't they? The bread would come from the Kraut, the games would be delivered by Southern politicians as always. Those games are more entertaining than any soap opera.

The more I think about it, the more I must say that this idea stinks like a garbage bin with rotten fish. Wasn't Europe supposed to be a peace project?

‘Germans fear a European transfer union because money is not growing on trees. We work for our money, we must earn it. Why should we gift our earning to other rich Europeans? So that they can more likely afford a Mercedes while we can less likely afford the very same Mercedes? Nice for Mercedes, nice for the South, bad for us citizens. Something stinks here.’ [mashed potatoes]

Though a non-German, I am largely in sympathy with the drift of your thoughts. I was flabbergasted to read in the ‘Guardian’ about just how poor many Germans are:

‘"While conditions for employees working directly in the export economy are generally good, those in the domestic economy, particularly the service sector, are often badly paid and have poor job security and that trend is growing. Women and young people are particularly badly affected," says Claus Matecki, federal executive board member at the Confederation of German Trade Unions (Der Deutsche Gewerkschaftsbund, DGB).’

‘Germany still has no mandatory minimum wage. According to the DGB, based on legally-employed workers, there are now 1.4 million receiving less than €4 (£3.23) per hour, 1 million are on short-term contracts and 7 million are so-called mini-jobbers, earning €400 per month £323) and 70% of them have no other job.’

‘The fact that 50% of the population has no forms of savings or assets shows that low pay is not just a problem restricted to the unskilled sector, either. Children, too, are suffering. In Unicef's latest report on child poverty in rich countries, Germany is ranked 15 in terms of child deprivation, behind the UK (nine) and Spain (12).’

The number of minijobs is no good proxy for poverty or reduced houshold inome because they did NOT replace full time jobs and were/are in many cases simply a legal form of contracts that already existed before 2003.

It is correct that 5 million people have no other job than the minijob, but one should analyse the reasons, something the DGB is of course not interested in.

a) reduce the willingness of the takers to take the tough measures needed to reach a self-sustainable business model

b) generate hostility on the payer's side, since they and their children have to reduce their standards of livings, to prop up the standards of livings of aliens

This is of course even more true within the Eurozone, an artifical conglomerate of foreign nations, who have much less in common than, say, Bavaria and Bremen.

The Euro and the endless transfers do not stabilize the system, as politicians wrongly claim. Quite the contrary. They destroy it, since they DEMAND solidarity (which is a caveat in itself), and on top of this the solidarity is designed as as a permanent one way street.

Before the currency union, war between european nations was absolutely unthinkable. This changes slowly, thanks to the misdesigned currency- and transfer union.

Of cause "givers" like Bavaria or Hesse complain about redistributing money to its poorer sibblings.

But as everybody knows in Germany we are one nation, one people.

Not only after the reunification did millions of east Germans moved west and paid taxes there and millions of west Germans moved east and paid taxes there.

We share a common history of good and bad times. Bavaria used to be the backyard of Germany for centuries. Only recently, after the second World War, did Bavaria transform itself into a hightech state. World class companies from Berlin or east Germany moved (fled) to Bavaria.

And since even most nationalist Bavarians accept these facts, there will never be a secession of any German Bundesland.

Spaniards and Italians don't even want to pay for their own people. They prefer to split their nations. That's the real irony. A bitter one for every German.
Just imagine Germans would need money from the club med. The game would be already over.

Italy is a very large net contributor to the EU budget - on a per capita basis almost at the same level as Germany.

Portugal, Malta and Cyprus cost northern Europe practically nothing. Spain, although a large net recipient in the past, has also now swung to a balanced position. The only large net recipient in the south has been Greece, for a long time.

I should also point out that Italy's sizeable net contributions (given the size of our economy) more or less equal all other net benefits going to the rest of southern Europe, so that as a bloc we are a neutral expense in Brussels.

German money is going mostly to Central Europe - not to the South. Any notion to the contrary is mostly propaganda by East Germans seeking to divert attention in Germany from those who are truly profiting from subsidies.

I quite agree that money is fungible - but I am merely pointing out that the "South" is fiscally neutral and not a drag on the European budget.
And the only country that costs significant money to the EU in the south is Greece.
Does it seem like a good time to cut that aid? I think it should be re-directed to macro-stabilisation - i.e. help them pay the banks while they continue reforming their economy. A much better strategy that forcing another disastrous haircut on the lenders.

1. The south has become "fiscally neutral" (that is, Italian net contributions offset the net receipts of the other 5 southern countries) only with the current (2007-2013) budget, and since most EU transfers have been redirected to the east. Until 2006, that was different.
2. The part of Greece's sovereign debt held by foreign creditors is now almost entirely owned by Greece's euro zone partners: bilaterally, and via the EFSF.
A haircut thus wouldn't help Greece pay its international private lenders such as banks, as there are hardly any left, but simply mean that Greece's eurozone partners would write off some of their own exposure.
That's what the "trojka" suggested should happen, and which I am sure will happen.

1. Yes, although Italy has been a net contributor since the late 80's, but yes, Spain was a large net beneficiary from 1986-2006. As was Greece. (As was Italy in the 60's, 70's and 80's.)

2. You may be right, but this risks another round of contagion. Plus, writing off debt would cost taxpayers directly and be a lot more expensive than simply gifting a few billion to help Greece meet its immediate debt servicing obligations this year and the next, without cancelling the debts themselves.
Finally, cancelling debt means a cost of at least 20 billion euros to the Italian taxpayer - a nice shill by Germany, giving that our banks had no exposure to speak of in Greece originally. Once again, the truth is that Germany dumps its overlending problems on the Italian taxpayer.

You miss one fact. Even if Italian monies are so artistically denoted that they can be recognized after bank transfers from the common EU-wide account, still the 'South' as you say 'is a drag on European budget' because it does not contribute to the budget 'in plus',just makes the balance for 'South' neutral. Logically, it is the Northern net payers' which both make the 'North' fiscally neutral for the European budget' and are additionally responsible for all the remaining funding of EU. This remaining funding of EU is the lion's share of EU budget.

So in essence, the whole plot you present here is based on almost purely semantic game of division of the 'North' into 'Western North' and 'Eastern North' while you don't do it in relation to 'South', i.e putting Portugal/Spain and Greece into one category! though in many respects they differ more than many Nothern/Central countries. And that is the core of your input here since you have changed your nick from Joe Solaris to MilovanDjilas: to keep the division of the North into Western North and Central Europe (in a pill German/Polish) alive and flourishing. Good news for us, eg. Poles and Germans, on the overcoming past divisions, on the growing cooperation etc. etc. are bad news for you. Great European you are :/

I was talking about Euro-zone North/South, since that is where the crisis exists.

When I say Central Europe - I mean from Estonia to Bulgaria, given that they are all ex-Socialist countries. Note that all the ex-Socialist countries (save perhaps Hungary) exited the Communist system with little or no debt - while most of the Capitalist countries already had significant debt loads in 1989.

The consumer Capitalist model is destroying the economy of West. Zerohedge.com is right about that. If employers cannot pay decent wages then there is no money for average citizens to consume anything.

In my experience, the quality of life in much of Central Europe (I am thinking of the Czech Republic for example) is better precisely because they do not have so many multinationals who create disequilibria in local markets - driving up real estate prices by their presence but offering good pay only to a handful of local executives.

The ECB has not purchased Italian bonds since the beginning of the year. Nor is it expected they will have to in the future.
The Italian deficit is estimated at 2.5% this year. That is not huge deficit.
As for TARGET position - I do not give a damn. This is a mere accounting convention among the central banks - those with the power to create money out of thin air.
In the meantime, those TARGET positions reflect REAL MONEY flowing from Italy to Germany. Until we go bankrupt or leave the Euro (which will not happen) Germany is the country profiting from these flows, not Italy.
You don't really think Germany deserves to borrow money at 0% interest, do you? Why do you think Italians are the largest foreign holders of German bunds?
You Germans are ready to tell yourselves any lies to support your own arrogance and self-righteousness. But in truth you are lying to yourselves about the health of your banks and industry, covered up by your beggar-thy-neighbour export policies and the ESM programmes.
Italian banks had no exposure to Greece, Ireland or Portugal. Now through the ESM/EFSF the Italian taxpayer is on the hook for tens of billions to bail out German banks.
Let me repeat: ITALIAN TAXPAYERS HAVE BEEN BAILING OUT GERMAN BANKS OVER THE LAST 2-3 YEARS.
Will the German taxpayer now impose another haircut on Greece, costing the Italian taxpayer tens of billions of Euros? Germany is a bully, dumping its problem onto others.

Caro Joe Milovan Solaris Djilas :)
>Joe Milovan: I was talking about Euro-zone North/South, since that is where the crisis exists.<
Okey, Joe. Fine. Message received. Relax. I got it, you are talking about Eurozone when you say:
>Joe Milovan: German money is going mostly to Central Europe - not to the South.<
Joe, you can create whatever parallel reality you wish, of course, as long as you keep it interesting :)) Just relax.

I was merely pointing out that southern Europe is a neutral expense in Europe - and that the monies we are all paying are going to the ex-Socialist Central Europe.

If people are not complaining much about this fact, it is because we are all generally agreed that Central Europe should be brought up to western living standards as soon as possible. In any case, Italy is not the country looking for a rebate in the budget negotiations. We are merely saying that do not want our regions or companies completely forbidden from receiving aid on the basis of a per capita national income level that is theoretically higher than in other countries.
I would like to see what will happen over the next few months with Germany, Holland, Finland, Denmark and the UK. These countries are net contributors and apparently have no desire to remain so.
I very much doubt the budget negotiations will go smoothly. They might even break down if the Norsemen become unreasonable.

p.s. You really do not like the name Djilas, do you? A very great man, really. The first to denounce the new class of apparatchiks in the socialist system, who still plague both Italy and Poland today.

So it's Central Europe again, not the Eurozone. Wow :)
Joe, I am amused, not angry. In the past I have heard about "Italian" propensity to certain kind of democracy, but never had the pleasure to witness it directly. So - thanks.
I hope you don't mind my calling you Joe. I have nothing against your new name, just got used to the previous one. I understand, and founnd it interesting to decipher the rationale behind themorphing into Mr. Djilas. Little pastimes of the virtual reality era :)

As to budget talks. I tend to think Charalemagne knows what he say when he writes that the most probable outcome is the budget of little change. In Polish we say - złapał Kozak Tatarzyna, a Tatarzyn za łeb trzyma (Cossack collared a Tartar but Tartar grips the Cossack).

Overall, the most important words are these:
>Charlemagne: The bitterness that the EU budget generates is disproportionate to its importance. It accounts for just 1% of the union’s GDP, or about 2% of government spending; the disputed amount is a fraction of this.<

1. Joe, if you could leave the faux Italy v Germany dichotomy aside for a second, we might even have an intelligent debate (FYI: main lenders to Greece at the onset of crisis, 2010: France, Switzerland, Germany - in that order. French exposure to Greece was nearly twice as high as Germany's, 70 to 40 billion, so why not accuse the French of "unloading risk"? Or the Swiss, who contribute not a cent to the rescue of Greece?)

2. To the larger point: All politicians prefer kicking the can down the road to biting the bullet, and notably in an election year. If Italy's share in the next Greek haircut would be 20 bn, as you say (on what basis? - another 100 bn?), Germany should be in for around 28 bn. You can bet on Merkel wanting to avoid such neavy losses with elections scheduled for next fall. But these things have a dynamic of their own.

3. A haircut IS a way of gifting Greece money.

4. My impresssion is that EU leaders want to avoid a disorderly default of Greece, and to make it live within it means – but are willing to cancel large parts of its debt if (and when) it does. I find that a very realistic approach, even if I don't like to pay for Greece's mess. But better realize losses now then have them run up much longer.

5. Did anybody ever believe the rescue of Greece would come at no price? I didn't. Ah, well, you told us there' d be "no real money spent". I guess history is about to prove you wrong... .

1) France did not lend to the state - two French banks had large Greek exposure because they had subsidiaries in Greece. These have just been sold off this month.
Also, I do not point fingers at France because they are not the ones holding back the ECB or attempting to deny aid to Greece. THANK GOODNESS we have a Frenchman (woman) at the World Bank, because if we didn't there would be hell to pay with one like Weidmann or Axel Weber.

2) For example, let's say 100 bn - anything less will not do the trick and it is likely to be more.
I hope you are right about elections and avoiding this solution.

3) A haircut is a poison gift. There is a difference between gifting a few billion to help the country pay its creditors, and telling the world an EZ country cannot, will not pay and will not receive any help in paying. Why bother than having an EU budget at all? To help only those private individuals and economic interests who are able to present a request for EU funds? Screw that. What private interest is more important that macroeconomic stabilisation? Plus, Contagion, Contagion, Contagion.

4. Better than cancelling any part of its debt would be finding money to repurchase their debt instruments on the secondary market.
What Merkel and the Bundesbank fail to appreciate is that a certain amount of limited gifted aid, coming from the EU or directly the larger states (I have always said the Original Six), is necessary to stabilise the Greek economy, without which any reform effort is doomed. If the recession is not halted, privatisations are impossible.
Proceeds from privatisations can be used to repurchase Greek debt instruments. For that matter, Greece was receiving what? About six billion annually from the EU? Use that money instead over the next seven-year period to repurchase their debt, which at these prices would amount to retiring close to 6-7% annually.

5. "No real money" was a phrase I used to argue for one-off aid, (let's say, twice-off) this year and the next, to make up the difference between what deficit Greece can achieve on its own steam and Maastricht's 3% deficit.
If they get to 7.5% this year, a 4.5% difference is about 11 billion. divided amongst the Original Six, that would be a trifle with no real effect on our deficits (< +0.2%). If they can get to 5% next year, that would be half a trifle.

"History" is not about to prove me wrong. German policy instead has been bent, from the very beginning of this crisis, on causing as much damage as possible. At each step, Berlin and the Bundesbank have been extremely reliable in choosing a hard-nosed policy that will cost everybody the most in the long run. (But which in the short-term has the rest of the world in awe at Germany's ability to bully the rest of the EU.)

Once again, as 100 years ago, Germany has been instrumental in transforming a minor crisis in the Balkans (Greek gdp is less than 3% of Euro-gdp) into a continental catastrophe.

German policy is not "forcing reform" (no reforms are possible under these conditions for Greece) is not "setting an example for others" and is not about "leadership" or "sound policy". It is merely about counting pfennigs while losing hundreds of billions, destroying both the EU and Europe, and leaving damage that will require half a century to repair.

Of course you do not care about the target position. It is not your money. You weren't complaining when the capital flow took the other direction after the invention of the euro. Money flows have reasons. Do your homework as we did. For example create such thing as an Italian taxpayer.

You are out of your mind and filled with prejudices that do not correspond to reality. We are not Greece. The focking tax take - the real, effective tax intake of the state- has hit 55% of gdp here.
We are point 21% VAT, €2.00/litre for petrol, a new property tax has hit all homeowners, when buying even a used car the title transfer tax is €700. Companies, including micro-firms with VAT numbers, are paying upwards of 67% tax on revenues - screw the idea that our corporate tax is only 40%... we have several other taxes that are also applied to firms, including a tax on gross income even before arriving at the bottom line net profits.

And in the meantime, at least here in Friuli, the tax police are investigating EVERY JURIDICAL PERSON with VAT number and seeking out any excuse to levy massive fines.
One high-tech company I visited several months had sales of €12 million, net profits of €500,000...
The tax police audited the firm two years ago - clean bill of health.
Last year they returned to audit a second time - in two years - and decided to levy a back fine of €3 million Euros on the firm (six years of profits) for... what? The same past accounts they had already audited the year before - "There has been a new ministerial circular defining a new method of interpreting regulations - your past accounting was incorrect - pay up."

Under these conditions, huge numbers of our firms are closing down - often declaring voluntary bankruptcy - and moving to Austria or Slovenia.

Tax evasion is estimated to be around 18-20% in Italy. (Note that in Germany it is estimated around 14% - not so far really).
If there were no "evasion" in Italy we would be paying 85% taxes.

The bitter joke in Italy now is that they have simplified the tax forms down to two lines:

Line 1) How much money did you earn last year?

Line 2) Please send that to us.

I have a hard enough time soliciting payment and trying to stay on top of the new taxes. I do not have to put up with insults from idiot Germans also.

Scharnagel is a joke. As the article points out, Bavaria was a taker for many decades, so this system helped Bavaria to become an economically strong state.
Another weak point for Bavaria is the student fees. We could easily avoid paying fees in Bavaria as well. Government just could abandon it. I've been paying for 5 years and nothing has been improved really. In opposite many young men and women did not start studying.
Anyway we have elections in Germany and Bavaria next year, so all thats happening right now (and described in this article) is already part of campaigns.